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Tax Cuts Put the Brakes on Bracket Creep

REUTERS/Shannon Stapleton

By Michael Rainey

September 14, 2018

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Receipts from individual income taxes tend to rise every year due to what economists call “bracket creep” – the movement of more taxpayers into higher tax brackets over time, even as tax rates stay the same. Bracket creep can result both from inflation and from increases in real wages, and there’s evidence for both effects being in play in recent years.

In 2018, however, bracket creep appears to have been neutralized, at least in terms of real (that is, inflation-adjusted) wages, according to an analysis by District Economics Group in Washington. The chart below shows that individual tax receipts as of September 10 are almost the same as they were at the same time last year – something that hasn’t happened in previous years, when receipts grew by tens of billions of dollars on a year-over-year basis.

“As of September 10, 2018, real individual income tax receipts basically match its level at this time last year. So this year looks as if we’re not getting that real bracket creep, even as the macroeconomy and personal incomes are growing,” DEG writes.

The likely source of this effect, according to DEG, is the tax cut legislation that doubled the standard deduction and reduced rates, potentially offsetting any increases in real wages that in years past would have produced higher tax revenues. If that’s the case, then revenues can be expected to start increasing again next year after this one-time downward adjustment, as bracket creep begins having an effect once again.